The mantra of eurocrats is quite obvious: When times get tough, roll out already discarded rumors and hope they stick for a while.

Earlier today yield on 2-year Spanish bonds hit 7.14%. The yield now is a still unsustainable 6.42%.

What happened?

The answer is another silly rehash of something the German constitutional court probably would not allow, and is not even being seriously discussed at the moment anyway: a banking license that would allow the ESM to use leverage

European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

“I think there are pro arguments for this,” Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.”

Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

“It is not something that is only in the field of monetary policy, so this is part of a broad discussion,” Nowotny said. He declined to elaborate.

Purposeful Non-Elaboration

Declining to elaborate was a good move from the standpoint of politics. The more that is said about rehashed ideas, the less believable the rumor is. Note that the ECB has already rejected this idea, so has the German central bank and numerous German politicians.

Moreover, no one really wants to discuss this issue now anyway, fearing it might impact a German constitutional court ruling coming up in September.

The game plan, if there is one (other than obvious BS), is to sneak this idea in later, after a favorable court ruling. However, if Merkel really supported this idea, it would have happened already.

It is quite possible the constitutional court picks up on this chatter, and puts an end to the idea even if it approves the ESM. Let’s hope so.

Regardless, leverage will not solve anything, anyway. This rehash of a discarded idea might calm the markets for a few days, but that is likely it.

Mike “Mish” Shedlock
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